Production Company Funding

Most mature production companies fund at least some, if not all, of their development expenses from cash flow or bank credit facilities. For most of these companies, this funding is interim, part of their essential forecasted cash flow, and is repaid to the production company by each of the production company’s single-project producing entities, as a combination of recovered production expenses and development fees that were advanced. These are paid to the production company when its producing entity receives its production funding.

Studio Financing

The studios’ production departments provide development financing for only the most established independent production companies. Some have a long-term production relationship with the studio, like Malpaso with Warner Bros. Then, there are former studio executives that negotiate themselves into independent production structures, like Peter Chernin, Chernin Entertainment with Fox. The chief studio motivation in these relationships is the copyright ownership and global distribution of significant pictures from seasoned, reliable production companies.

Investor Financing

Successful producers often engage in relationships with a limited number of sophisticated private investors who provide development financing for their projects. Most mature balanced production companies sustain sufficient cash flows from earnings and maintain bank credit facilities substantially greater than are needed to finance all their development expenses without engaging investment capital. Some of these companies still elect to use development private-investor partners. Their primary motivation for this is that development investor partners do the following:

• Demand for defensible planning and forecasts and accountability for each picture’s actual development progress that are more rigorous than in-house.
• Deliver scheduled use-of-funds reports giving the development team continuous urgency to financially over-perform.
• Share the producer’s risk.
• Conserve capital availability for other use.

In Chapter 11, the terms and company structure that best accommodate development investors are presented. Producers should prepare a development business plan and, if necessary, a private placement memorandum (PPM or offering) with the assistance from and under the direction of an experienced securities attorney.

Regardless of your global territory, there are local and national government securities regulations to which such offerings and investor relations must comply. In the United States, there are state and federal securities and exchange commissions (SECs). These regulators both protect investors and provide a structure that governs and identifies investment offerings.

For the past several decades, development offerings were most often prepared for the exclusive review and participation in a securities investor category that in the United States is called sophisticated or accredited investors. This securities category varies depending on where you globally reside, but it basically refers to investors who are experienced in investments similar in amount and risk to the one being offered and who possess a specific minimum net worth that demonstrates even greater sophistication and the investor’s ability to risk the investment’s failure.

The advantages of using this offering category are that, first, the producer has an exclusive relationship with investors who are durable and experienced, thus allowing for less fear of investor impact if the development company fails to achieve its objectives. It also makes for smoother presentations to experienced, business-savvy potential participants.

Another important advantage of sophisticated/accredited investor offerings is that they are simpler, less expensive to author and publish, and less time consuming to prepare than unrestricted public offerings. Sophisticated/accredited investor offerings are restricted in their content, presentation, and number of participants. Among other minimum requirements, sophisticated/accredited investor offerings must conform to securities regulation language. This language gives investors and their representatives reference to each offering in relation to the laws governing it. It also includes complete and clear declarations of the risks related to the investment.

However, in the United States, the JOBS Act, Rule 506(c) has been amended, so that it permits general solicitation and general advertising of private placements, as long as reasonable steps have been taken to verify that each investor is accredited.

The offerings are typically numbered, and a log is kept of each investor who has been presented an offering copy, those retrieved, and the number of investment interests purchased. Depending on the securities regulations, the number of participating investors may be limited to as few as 10. This restriction keeps the investor group to a manageable size, but it may result in a high per-investment amount, which may further restrict the number of potential investors.

Further, relating to the above referenced United States JOBS Act, since May 2016 it is possible to go to non-accredited investors for development funding, as well as be able to market and advertise the development fund offering to the public at large–sometimes referred to as “Regulation Crowdfunding.” A producer can raise a maximum of $1 million through an equity crowdfunding offering in a 12-month period. All transactions under Regulation Crowdfunding must take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. This type of financing is more thoroughly explained in Chapter 6, Production Financing.

A producer’s first development offering is often the most challenging to prepare and fund. However, following the initial successful offering, subsequent offerings are simpler to author and fund. Some of the original investors typically want to reinvest in one or more of the producer’s future development entities, and new investors are substantially easier to engage, using the first development company as powerful reference proof.

Most producers find it challenging to obtain their initial development financing. But sophisticated investors are just that. They are skilled investors, looking for exceptional investment opportunities. They wisely tend to shy away from untried management teams and industries in which they are inexperienced.

Co-production Company Financing

Production companies can receive development financing for their projects from other production companies that have development funding and, consequently, are seeking the strongest stories.

The two most desperate development positions for producers to be in are

• (1) to have one or more sterling stories that have passed their internal greenlight but do not to have sufficient capital to develop them, and
• (2) to have development capital and either only weak stories to choose from or no story that has passed their greenlight.

Producers are generally very receptive to story pitches from other producers seeking funding through co-production relationships. Co-development/production relationships are most often set up for a single picture. One production company provides the story and the related development progress invested to that time and whatever talent/distribution and other added-value they bring; the other production company provides the remaining development capital and their talent/distribution and other added value they bring. They both share in the development and production of the picture. Equity is divided per the value of each party’s contributions.

Government Agency Financing

Most countries have an economic development department. The common mandate of these departments is to grow their countries’ GNP (Gross National Product/commerce to its businesses/employment to its citizens). Many of these nations provide a broad variety of support, including outright grants, tax incentives, rebates, and loans. Some of these are exclusive to entities headquartered in or at least residing in these countries; others may be participated in by those globally, if the production entity complies with the specific program’s criteria. Countries may be further bolstered by additional jurisdictional government bodies (states, provinces, and territories) with similar incentive programs. Some programs are offered by a collaboration of multiple countries, such as the European Union.

Information on these programs is readily available (much of which is an astounding bundle of difficult-to-navigate documents) from the agencies that regulate them. As these programs come and go with the government bodies that oversee them, it is most beneficial, safe, and sane to use a legal or accounting group that specializes in the specific program(s) in which you are interested. Allow them to evaluate, recommend the strategy, and apply and manage the relationship. Whereas some countries do not provide any development funding, other countries provide much or all of it to those who qualify.

Crowdfunding: Donations

Crowdfunding (as opposed to Equity Crowdfinancing) describes the collective cooperation, attention, and trust by people who network and donate funding, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns.

Crowd funding is an alternative model for both development and production financing. It has no investment component. This process has been inspired by the reality of what millions of people on the web can do if only a small percentage donates a modest amount each to something they want to make happen. For their donations, crowdfunding participants typically get a gift of a DVD, an opportunity to be on the set during production, a production crew jacket or cap, or whatever may be of value to them that is unique to that project. Regardless the exchange, it cannot include giving participants a return of their donation or future project profits.

Crowd or tribe funding works especially well for documentaries, social issue pictures, or anything people care enough about to help make happen. To succeed, producers need access to people with a common interest in the project’s subject (or Affinity Groups). Total amounts typically are under $100,000. However, some have succeeded in seven figure amounts.

This is a quickly maturing arena, only restricted by the size of the crowd, a producer’s access to them, and giving the crowd a vision of what remarkable thing they can make happen by adding their small “brick” to bring the project to life.

Two crowdfunding movie sites are www.IndieGoGo.com and www.Kickstarter.com. Both sites use a donation model that also offers the participants bragging rights that they made it happen and their production crew cap, jacket, or movie poster. The rewards for donations from funders are typically tiered, offering larger rewards for larger donations.

Because soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the SEC in the United States, producers should receive a complete legal review as to the full solicitation, including what they may be giving away, before using this model.

1. Develop a Business Plan

This is the cornerstone to success in obtaining the necessary funding. Refer to Chapter 6 for the elements a business plan should address. Producers should evaluate their resources (operating team, stories, cash flow) and recommit to or redefine their mission statement (why they are in business, the kind of pictures they want to make, the way they want to make them, the style of doing business internally and with others, and so on). They should also make decisions about the basic development planning possibilities, including the number of pictures to be developed within their separate development company (or within a given time period if development is funded from working capital), the stories (if any) that the producer has, and the most logical sources from which to receive development funding.

2. Prepare the Activity Projection

The Development Activity Projection provides the development team, investors, and other interested parties the primary development activities to be performed and when they will occur.

The below activity projection shown in Figure 12.2 has been set up for the development of three pictures. All three pictures’ activities are shown month-by-month for the first two years and annually thereafter.

Several production companies are currently using this basic form for planning and managing their development operations/companies. It is a powerful planning, accountability, review, and plan-revision tool, enabling expense and income projections, and cash flow analysis. Along with the cash flow projection, it is confidentially shared with the bank, investment partners, Executive Team members, and regularly referred to by the operating team.

Though this projection example is for three pictures, the projections activities and format are universal. The layout may be helpful to producers in planning their individual development operations/entities. The timing represented is just an example—producers should not expect their plan to be timed like those in the example. There is an activity projection on the eResources page, www.routledge.com/9781138050938, ready to be filled in.

The projection’s upper far-left row labeled Event tracks the major worldwide markets and sales events. Various points about how the producer accomplishes the activities referenced in this projection have been presented in previous chapters, are chronicled in Chapter 14, and/or are presented later.

The initial activities are labeled Start-up. Some categories are for new producers who have not previously engaged an attorney, publicist, or entertainment bank, or who have not started trade press releases for their production company.

The Development: Creative section primarily charts the producer’s story discovery plan. This plan includes developing stories that are already discovered and internally greenlit, as well as soliciting and reading scripts (as part of the search for new properties). Subsequently, the producer goes through the process of garnering their home territory and international distributor greenlights.

For most projects, attaching the director, which includes researching, creative meetings, and negotiating, precedes attaching lead talent and most other development functions. A director is fundamental to each picture’s creative life. It is essential the director be brought in early and allowed to participate in all other facets of a picture’s development and production.

Figure 12.2a Activity Projection

Figure 12.2b Activity Projection

In addition to the Events listed in the Activity Projection, when it is project-appropriate, you may consider attending some of the following events.

GDC (Game Developers Conference)

The world’s primary electronic game forum, attended by over 20,000 game industry professionals (business decision makers, producers, designers, programmers, artists, and others involved in the development of interactive games and virtual reality), to exchange ideas and shape the future of the industry. Held yearly at the end of February and early March in San Francisco.

E3

The largest global fan-centric electronic game (computer, hand held, mobile phone, and console) show, held annually for three days, mid-June, at the LA Convention Center.

Gen Con

Gen Con Indy is the largest global game convention for live-action role playing, miniature-action, strategy, table top, board, card, and other non-electronic games. Held annually, four days in mid-August, in Indianapolis, Indiana. Hundreds of world-class exhibitors, over 7,000 events.

Comic Con

The largest comic book and popular arts convention in the world with over 300,000 attendees at the annual International ComicCon, held in San Diego for five days in mid to late July. There are now ComicCon events in multiple territories.

SVVR (Silicon Valley Virtual Reality)

The largest global virtual reality convention. Every major VR creator is represented. With multiple times growth per year to continue for at least the coming decade, this will become a must attend event–and already is for many.

Development: Production

This charts the development of the production budget and schedules that are created from the script and are coordinated and eventually reviewed and approved by the picture’s completion guarantor.

3. Prepare the Cash Flow Projection

After the producer has completed the activity projection, showing specifically how development of a series of pictures will be accomplished, then a cash flow projection can be prepared. This projection applies expense amounts to the activities chronicled in the activity projection, plus the related overhead, such as rent, phones, salaries, and taxes. Some of the production company’s expenses are passed through to the development company. For instance, the producer typically is one of the development directors, so the development company will pay that appropriate portion of this salary, office space, and equipment expenses during the picture’s development.

A cash flow projection sample is presented in Figure 12.3. Like the activity projection, this is only a sample. Producers should prepare their projections with the assistance of their accountant or business manager and apply expense amounts appropriate for their organizations.

There are two cash flow projections on the eResources page, www.routledge.com/9781138050938, for your use.

One is in the sample projection’s format but without amounts; it is ready to be filled in. The other has the sample projection’s amounts filled in. This projection may assist users with points of reference until they become familiar with these expenses. Extending for five years, this projection indicates expenses incurred monthly with a year-end summary.

The top of this projection should list the sales events attended by the producer, as well as the most significant activity benchmarks from the activity projection. These are not mandatory but are a helpful reference for all using this projection.

Below the activity references are Cash Receipts, a listing of all the development company’s income by projected receipt date. Each category should be referenced here, including, but not limited to, investments received from the producer, private investors, and loans, as well as income generated from the sale of the developed pictures to the single picture producing companies. If this sale includes development company profits participation in the projects, the income from this participation should also be shown. The investment amounts are usually left blank until the expenses are completed and totaled. Once the expenses are identified, the producer will know how much is needed to fund each picture’s development.

Following cash receipts is the list of Development Expenses. The first items listed are rights option and purchase price, retainers for production/performing talent. Following these expenses are professional fees, then overhead items, payroll taxes, insurance, miscellaneous print and promotional materials, and a contingency, followed by the total expenses for that month.

Below Total Expenses is the Monthly Balance, which is the month’s total income less the month’s total expenses. On the next line is Cumulative Cash Flow, which lists the monthly balance plus the cash remaining from the prior month.

After all expenses are filled in, the preparer can examine the total cumulative cash flow for the month following the first picture’s theatrical release date and have a starting point in estimating the amount of development financing that is necessary to develop the proposed picture(s). Depending on development duration, it may be necessary to calculate the cash flow projection monthly for the first 24 months to determine how much the development company will need until it is cash flow self-sufficient.

Typically, development companies (this does not apply to development operations) are set up for a fixed number of pictures, and the highest expense categories terminate after the pictures have sold to the producer’s producing companies. After this time, the remaining expense categories shift to new development entities, or the production company.

Following the first expense pass, the producer often will reassess the basic elements of the plan. This includes looking at the number of pictures to be developed, the activity projection timing, and the major category expenses. There must be a balance between a sane development/production schedule, income and expenses, and the producer/investor return and earnings motivations. Several revisions typically are made to these two projections (Activity and Cash Flow) before a balance is reached with which the producer is content.

Figure 12.3 Cash flow projection

4. Select the Development Team and Advisors

As reviewed in Chapter 13, the team directing the development operation/company includes the development director(s), an operations person, and development assistants. There will also be outside professionals, including an attorney, banker, completion bond company, physical production specialist (retained UPM), and a publicist. This team is usually members of the production company team.

As each project’s development is no more impressive than the team developing them, most investors look first to the development team when evaluating the development offering. The development team should be well represented in the offering.

5. Formulate the Development Company Investment

Even if the investment is completely internal, separate development operations should be planned, projections run, analyzed, and sweetened. It can even be beneficial for separate entities to be formed and financed from the production company. As this occurs, even if internal, terms of the investment or loan should be prepared between the companies. Even if internal, the pictures, production company, and investors should receive the greatest amount of protection, along with the most efficient tax consequences possible. If there are private investors, they will need reasonable incentives and protection. The producer’s accountant and attorney who assist in the deal formulation, tax considerations, and securities issues, may lead in these functions and will surely provide the final review and recommendations. Many of the basic considerations relating to this step are reviewed in Chapter 11.

6. Prepare the Investment’s Documentation

Even if the production company is the sole investment source, documentation should be prepared and entered into with legal, producer income, and tax consequences that facilitate the plan’s formal engagement.

The producer’s attorney usually prepares this documentation. If funds are raised from private investors, a securities attorney may lead and will review and polish the final documentation. No investment documentation should be distributed until it has passed an attorney’s review.

7. Make the Presentations and Fund the Development Company

Regardless of which of the sources of development financing the producer receives, an offering or finance agreement will be written (except for the donation crowd funding model), and, after acceptance, the documentation will be completed and the funding obtained.

If the funding is to come from private investors and this is the producer’s first private offering, it is often constructive to make a list of potential investors, another list of people of influence who may recommend sophisticated investors to consider the offering, and another list of brokers, investment counselors, and securities dealers. The sources in each category should be prioritized and a plan prepared as to how to approach each source.

Raising private capital is especially challenging for a new production entity. For these producers, a strong team (presented in Chapter 13), with exceptional stories under consideration, with at least one picture’s internal greenlight analysis completed that indicates a producer’s share of earnings that is twice the picture’s production cost, making a professional presentation, and offering a motivating investment structure are critical to success in receiving the needed development capital.